Travel smoothly Take a more confident step into the markets with Minimum Variance ETFs FOR QUALIFIED INVESTORS ONLY This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA). Protect myself April 2018
Protect myself Minimum Variance Take a more confident step Navigating a safer path 4 Adding a new dimension 6 Building a smarter index 8 Comparing the indices 9 Does it work? 10 Discover our range 12 Why Lyxor for Smart Beta? 13 Knowing your risk 14
3 Extraordinary monetary policy has forced many investors into equity markets for yield, capital return or long-term inflation protection - who are not naturally comfortable with volatility. Yet volatility is here to stay, and valuations are stretched, so discomfort could soon turn to something far worse - especially if the political climate changes dramatically. Stepping into the unknown can be unnerving, even for the most experienced investors. When things get rough, you need a portfolio that can handle the pressure and allow you to identify the risks that really are worth taking. That s where minimum variance comes in. Minimum variance strategies won t eliminate the possibility of loss, but they can help dampen volatility and smooth returns, allowing you to step more confidently into new equity markets. François Millet Head of ETF and Index Product Development
Protect myself Minimum Variance Navigating a safer path Strategies aimed at reducing volatility have proliferated in recent years. Some, like factor-based low volatility strategies, tilt more towards performance than reducing risk, while standard minimum variance strategies focus more overtly on risk reduction. Albeit superficially similar their approaches are in fact very different, yet in our view equally flawed. Traditional low volatility strategies tend to hold only the least volatile stocks, or re-weight an existing index around its less volatile performers. Standard minimum variance strategies consider not just volatility, but correlations too. Yet both routes point to so few stocks, countries or sectors that overcrowding, or concentn risk can become an issue. Don t concentrate too hard Some countries and sectors are naturally less volatile than others, but limiting yourself to these areas poses unintended risks, especially with the investment world as it is today. Since the financial crisis, investors have favoured a relatively small number of high quality, low volatility stocks. Such crowding leaves them poorly diversified and vulnerable to a change in sentiment. More effective diversification is vitally important given more markets and sectors are moving in the same direction at the same time. Volatility
5 Our approach We work unceasingly to determine the indices most capable of providing solutions for the problems you face today. When it came to reducing risk, we chose the FTSE Minimum Variance indices because we believed they could deliver the best outcome for you. Diversification Correlations FTSE Minimum Variance indices can reduce risk by approx. 20% 1 1 Source: Lyxor International Asset Management, Bloomberg. Data based on annualised volatility reduction of FTSE Developed Europe Minimum Variance, FTSE Developed Eurozone Minimum Variance, FTSE USA Minimum Variance, FTSE Emerging Minimum Variance and FTSE All World Minimum Variance indices over period from 30/12/2006 to 29/03/2018. Past performance is not a reliable indicator of future returns.
Protect myself Minimum Variance Adding a new dimension Unlike conventional strategies, our diversified minimum variance ETFs take a truly multi-dimensional approach to reducing risk.
7 Reducing volatility shouldn t have to come at the cost of greater concentn and less agility. We d rather prepare for any eventuality by spreading risk wider and distributing it more evenly. 1. Optimised portfolio We believe it s smarter to build an optimised portfolio that factors in stock volatilities and correlations to minimise index risk. Measurements are based on FTSE s research over rolling 24-month periods. The result is a more stable portfolio of stocks that are less volatile and move relatively independently. 2. More is more We operate some of the strictest diversification targets in the industry. Our ETFs tend to hold between two and four times as many stocks as other strategies (over 300 more for the FTSE USA Minimum Variance example). This means that your risk is spread over more than twice as many stocks as similar minimum variance strategies 1. 3. Balanced targets Setting global diversification targets helps us to prevent stock specific risks, avoid herding into the most crowded trades and smooth portfolio returns. We limit the weight of any individual stock to a maximum of 1.5%, and ensure that no sector accounts for more than 20% of the portfolio. This helps to prevent any extreme weighting in our portfolios. This works in conjunction with the index level diversification targets to ensure the indices have diversified stock names as well as diversified stock weightings. The result The resulting indices strike a balance between volatility reduction and diversification. This added dimension of diversification creates more robust portfolios. Over time, these indices have shown they can reduce risk by approximately 20% 2. They have also shown they can outperform their parent indices, like the FTSE Europe for example. 1 Source: Lyxor International Asset Management, March 2018. Comparison drawn between all five of our FTSE Minimum Variance indices and other leading products in the European ETF market. 2 Source: Lyxor International Asset Management, Bloomberg. Data based on annualised volatility reduction of FTSE Developed Europe Minimum Variance, FTSE Developed Eurozone Minimum Variance, FTSE USA Minimum Variance, FTSE Emerging Minimum Variance and FTSE All World Minimum Variance indices over period from 30/12/2006 to 29/03/2018. Past performance is not a reliable indicator of future returns.
Protect myself Minimum Variance Building a smarter index Starting universe Europe example Starting universe 500+ stocks in FTSE Developed Europe Index Selection Process Selection Process Assess daily volatility Factor in correlations Retain 55-70% of original universe No stock weights greater than 1.5%. No sector more than 20% Final Portfolio Final Portfolio c.360 stocks Source: Lyxor International Asset Management, as at 29/03/2018. For illustrative purposes only. Detailed methodology may be found at www.ftserussell.com
9 Comparing the indices The chart below highlights how the design of a diversified minimum variance index differs naturally from the original universe. As you can see, it has less exposure to traditionally more volatile sectors like financials, information technology and energy. But retaining most of the original index still allows you to invest almost as if you were still buying your chosen market. Sector over/underweights vs. the market cap 1 Telecommunication Services Real Estate Utilities Consumer Discretionary 20% 16% 12% 8% 4% 0% Consumer Staples Energy Financials Materials Health Care Information Technology Industrials FTSE All World FTSE All World Minimum Variance Index characteristics 2 Attributes FTSE All-World Minimum Variance FTSE All-World Number of constituents 1,977 3,177 Constituents (Wgt %) Average 0.05 0.03 Largest 0.18 1.83 Median 0.04 0.01 We are pragmatic replicators When it comes to how we replicate, we re pragmatic. We simply do what we believe is best for you in any given market. Smart Beta indices rebalance more often, and on a larger scale, than conventional indices, so we believe synthetic replication is the most efficient way to track them. It reduces the need to make regular changes to the holdings and can improve tracking. Top 10 Holdings (Wgt %) 1.58 9.85 1 Source: Lyxor International Asset Management/Bloomberg. Data as at 30/03/2018. 2 Source: FTSE Russell. Data as at 30/04/2018.
Protect myself Minimum Variance Does it work? The table below shows how the FTSE Minimum Variance indices have reduced volatility by, on average, over 26%. It also shows they have generated a consistent pattern of excess returns over the past ten years, all the while being very diversified indeed. Wherever possible, we retain at least 55% of the original indices. From 30/12/2006 to 29/03/2018 Excess Annualised Return Volatility Reduction % of original universe FTSE All World Minimum Variance Index 2.7% 27.5% 62.3% FTSE Developed Europe Minimum Variance Index 2.2% 25.4% 64.2% FTSE Developed Eurozone Minimum Variance Index 2.0% 28.7% 64.7% FTSE USA Minimum Variance Index 1.7% 20.8% 69.3% FTSE Emerging Minimum Variance Index 6.0% 29.7% 55.6% FTSE Developed Europe 564 FTSE Developed Europe Min Var 362 Stocks held MSCI Europe Min Var 169 istoxx Europe Min Var 84 Source: Lyxor International Asset Management, Bloomberg. Data from 30/12/2006 to 29/03/2018. Past performance is not a reliable indicator of future results.
11 Gain more, lose less One of the main long term benefits of the FTSE Minimum Variance indices is that they tend to a higher proportion of the upside when markets rise compared to the amount of downside d in falling markets. Up/down across the range 1 Up 72.9 % Up 80.3 % Up 75.0 % Up 70.9 % Up 70.5 % FTSE All-World Minimum Variance FTSE USA Minimum Variance FTSE Developed Europe Minimum Variance FTSE Developed Eurozone Minimum Variance FTSE Emerging Minimum Variance 68.3 % 76.6 % 71.7 % 68.0 % 65.5 % Down Down Down Down Down In need of a safety net? There s been plenty of volatility over the last decade, but diversified minimum variance strategies have demonstrated just how they can provide some protection when times are hard and markets are stressed. On average, as the table shows, they cut drawdowns by about 16.8% 2. All World Europe US Emerging 10-yr drawdown reduction 16% 17% 17% 17% 1 Source: Lyxor International Asset Management. Data period from 30/03/2008 to 29/03/2018. Past performance is not a reliable indicator of future results. 2 Source: Lyxor International Asset Management, FTSE Russell. Data as at July 2017. Past performance is not a reliable indicator of future results.
Protect myself Minimum Variance Discover our range ETF Currency Ticker TER Lyxor FTSE All World Minimum Variance UCITS ETF EUR, USD MVAW 0.30% Lyxor FTSE Europe Minimum Variance UCITS ETF EUR, GBP, USD MVAE 0.20% Lyxor FTSE EMU Minimum Variance UCITS ETF EUR MVMU 0.20% Lyxor FTSE USA Minimum Variance UCITS ETF EUR, GBP, USD MVAU 0.20% Lyxor FTSE Emerging Minimum Variance UCITS ETF EUR, GBP, USD MVAM 0.40% Source: Lyxor International Asset Management, as at 30/04/2018. Key Benefits of ETFs Liquidity Live intraday bid/ offer pricing on public exchanges. Cost Efficiency Low Total Expense Ratio (TER) 1 comprises of management fee and structural costs. Transparency All documents, counterparty information and fund holdings are available on the website. 1 Source: The Total Expense Ratio (TER) covers all costs incurred by the Management Company to manage the underlying assets. It comprises of the Management Fee and Structural Cost described as follows. The Management Fee represents the compensation for the Management Company services. The Structural Costs represent the custodian fee, the administrative fee, the audit fee and all other operating costs that will be paid by the Management Company to operate the funds.
13 Why Lyxor for Smart Beta? True to our heritage as pioneers, Lyxor was one of the first and remain one of the largest providers of Smart Beta ETFs in Europe. We now run EUR 3.5bn 1 in Smart Beta strategies, including one of Europe s biggest quality income ETFs. These strategies were refined and developed by acknowledged leaders in the field of quantitative finance. As advocates of open architecture, we always do what we believe is best for our clients. That s why, as well as using our own quality income index, we partnered with the world s leading index providers including FTSE Russell and J.P. Morgan to build some of our Smart Beta indices. Our portfolio managers are experts in dealing with the specific trading constraints of Smart Beta ETFs. We also have unfettered access to the authors of the original models underpinning our indexconstruction methodologies. Transparent Open architecture Each Smart Beta ETF adheres to our quality charter, ensuring each is managed to the same meticulous standards. Lxyor ETF Smart Beta Quality Managed to meticulous standards Heritage One of the first Smart Beta ETF providers 1 Source: Lyxor International Asset Management. Data as at 30/04/2018.
Protect myself Minimum Variance Knowing your risk It is important for potential investors to evaluate the general risks described below and in the fund prospectus on our website www.lyxoretf.com Capital at risk ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying index. Investors capital is fully at risk and investors may not get back the amount originally invested Replication risk The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication. Counterparty risk With synthetic ETFs, investors are exposed to risks resulting from the use of an OTC swap with Société Générale. In-line with UCITs guidelines, the exposure to Société Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk if they use a securities lending programme. Concentn Risk Smart Beta ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark. Underlying risk The Underlying index of a Lyxor ETF may be complex and volatile. For example, when investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks. Currency risk ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. Liquidity risk Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Société Générale. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
15 Important information This document has been provided by Lyxor International Asset Management that is solely responsible for its content. Lyxor FTSE All World Minimum Variance UCITS ETF - Acc- MULTI UNITS LUXEMBOURG, domiciled in Luxembourg, Lyxor FTSE USA Minimum Variance UCITS ETF Acc - MULTI UNITS LUXEMBOURG, domiciled in Luxembourg, Lyxor FTSE Europe Minimum Variance UCITS ETF Acc, MULTI UNITS LUXEMBOURG, domiciled in Luxembourg and Lyxor FTSE EMU Minimum Variance UCITS ETF Acc, MULTI UNITS LUXEMBOURG, domiciled in Luxembourg are collective investment schemes not approved by the Swiss Financial Market Supervisory Authority FINMA (FINMA) as foreign collective investment schemes pursuant to article 120 of the Swiss Collective Investment Schemes Act of 23 June 2006 (as amended from time to time, CISA) for distribution in Switzerland. Accordingly, the non-registered Funds may be offered in Switzerland exclusively to Qualified Investors as defined in the CISA and its implementing ordinance. This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA). Financial intermediaries (including particularly, representatives of private banks or independent asset managers, Intermediaries) are hereby reminded on the strict regulatory requirements applicable under the CISA to any distribution of foreign collective investment schemes in Switzerland. It is each Intermediary s sole responsibility to ensure that (i) all these requirements are put in place prior to any Intermediary distributing any of the Funds presented in this document and (ii) that otherwise, it does not take any action that could constitute distribution of collective investment schemes in Switzerland as defined in article 3 CISA and related regulation. An investment in collective investment schemes involves significant risks that are described in each prospectus or offering memorandum. Each potential investor should read the entire prospectus or offering memorandum and should carefully consider the risk warnings and disclosures before making an investment decision. Any benchmarks/indices cited in this document are provided for information purposes only. This document is not the result of a financial analysis and therefore is not subject to the Directive on the Independence of Financial Research of the Swiss Bankers Association. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investments in financial products. The Representative and the Paying Agent of the Funds in Switzerland is Société Générale, Paris, Zurich Branch, Talacker 50, 8001 Zurich. The prospectus or offering memorandum, the key investor information documents, the management regulation, the articles of association and/or any other constitutional documents as well as the annual and semi-annual financial reports may be obtained free of charge from the Representative in Switzerland. In respect to the units/shares of the Funds distributed in and from Switzerland, place of performance and jurisdiction is at the registered office of the Representative in Switzerland. Any information in this document is given only as of the date of this document and is not updated as of any date thereafter. This document is for information purposes only and does not constitute an offer, an invitation to make an offer, a solicitation or recommendation to invest in collective investment schemes. This document is not a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other trading venue as defined by the Swiss Financial Market Infrastructure Act of 19 June 2015 (as amended from time to time, FMIA), a simplified prospectus, a key investor information document or a prospectus as defined in the CISA.
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